Efficiency ratios

stock turnover

time it takes for a firm to sell its stock

—> faster means better because it would allow the stock to be replenished, resume earning of sales revenue

Improving stock turnover

• holding lower stock levels

• divestment of stocks

Debtor days

ratio measures average number of days it takes for debtors to pay a business back

• 30 to 60 days

Improving debtor days

• imposed penalties

• incentive to pay earlier

• legal action

creditor days

the ratio is used to measure the number of days it takes on average for a business to pay its trade creditors

gearing ratio

financial ratios that compare some form of owner's equity or capital to debt or funds borrowed by the company. It helps investors, lenders, and analysts assess a company's financial risk and its ability to handle debt obligations

gearing ratio meaning

Above 50 percent → highly geared, meaning it is in a vulnerable position. 

• Vulnerable to changes in interest rates as they will have to pay more in interest. It is difficult to seek further external sources of finance as lenders are concerned about the risks of default by highly geared firms 

adv of gearing

• potential for higher returns

• no need for personal capital

dis of gearing

• If relying on investments for income, gearing can make it difficult to access funds, especially during short-term periods or if the investment underperforms.

• If the investment performs poorly, or if interest rates rise, the interest costs can outweigh the returns, leading to losses.